ANALYSTS APPLAUD THE DEAL

Byline: Vicki M. Young / With contributions from Miles Socha, Paris

NEW YORK — Looking good.
That’s the general conclusion among retail and apparel analysts, who believe that the best is yet to come for the Donna Karan brand.
Anne Catherine Galetic, luxury analyst at Schroeder Salomon Smith Barney in Paris, described Donna Karan as a very good brand with untapped potential in Europe. But she cautioned that the company requires restructuring to become more profitable: distribution needs overhauling, prices need adjusting and the apparel-heavy brand should be diversified into higher-margin categories like accessories.
“All those things take time and resources, and success is not guaranteed. Even LVMH does not have a proven track record,” she said, noting the French group’s limited success to date with brands such as Kenzo, Givenchy and Christian Lacroix. “These are high-potential brands, but none of them has yet become a new Louis Vuitton,” Galetic concluded.
“I do think on balance that the deal is much better for Donna Karan as a brand. LVMH is a pretty strong partner financially and can help to further the brand and grow it internationally,” said Christine Kilton-Augustine, analyst at ING Barings.
According to Kilton-Augustine, some American sportswear brands have focused on Europe as a vehicle for expansion. “Unless you want to down-market brands, at some point you saturate the [U.S.] market. Partnering with LVMH makes it easier. All in all, it’s terrific for the brand and for the company, and it will help the Donna Karan brand compete against its peers who are financially more stable.”
She noted that the Donna Karan/LVMH deal is reflective of the ongoing consolidation occurring in the industry. However, Kilton-Augustine is not sure how many other brands could execute a similar high-profile deal because some of the other top American names are more “mainstream U.S. brands, not the kind of designer cachet that Donna Karan still possesses.”
Dana Telsey, equity analyst at Bear Stearns, observed, “The Donna Karan acquisition is another brand added to LVMH’s repertoire and helps LVMH to better penetrate the U.S. market.”
While luxe sales still are holding up better in the U.S. than other categories, Telsey noted that sales have since slowed from the earlier pace. The slowdown, she explained, is due to the sagging stock market in the U.S.
Yet, having a a top-notch designer name in one’s stable of brands doesn’t hurt the image when one is trying to build prestige and presence on a worldwide retail landscape.
Walter Loeb, retail analyst at Loeb Associates Inc., believes the acquisition of DKI suits LVMH just fine. “It was not a surprise that some adjustment would be made by LVMH to complete the deal. Donna Karan International now is an important star in the LVMH roster. It represents the first major entry into the U.S. for LVMH, and this gives LVMH a strong foothold here,” he added.
Now that DKI is under the LVMH umbrella, benefits should accrue elsewhere. Loeb expects that DKI will step up its expansion plans both by opening more DK and Donna Karan doors here and new doors as well in Europe.
Still, there are no guarantees for either DKNY or LVMH.
DKI is also still embroiled in nine shareholder class-action lawsuits — six filed in a Delaware Chancery Court and three filed in a New York State Court in Manhattan — alleging that the initial $8.50 per share bid by LVMH was unfair. There’s been speculation in the markets lately that LVMH would have to up its bid to effectuate a settlement of those lawsuits, but nothing in the SEC filing indicates that any settlement has taken place.
Bruce Kraus, a law partner at Willkie Farr & Gallagher’s corporate practice group, observed, “Those kinds of lawsuits are generally not an impediment to getting the deal done. The only thing that really defeats a merger deal in the real world is if there’s a higher offer from another party or a deterioration in the business and the buyer backs away.”
DKI designs and distributes collections of men’s and women’s apparel, sportswear, accessories and shoes under the Donna Karan New York, DKNY, DKNY Jeans and DKNY Active brand names. The company also grants sublicenses for the manufacture and distribution of products under its brand names for beauty and beauty-related products, jeanswear, activewear, hosiery, intimate apparel, eyewear and children’s apparel. The company’s major brands are Donna Karan New York, DKNY and DKNY Jeans.
In recent years, the company’s restructuring initiatives have helped the fashion house get its finances back in order. In 1997 the company posted an $81.4 million loss, but managed to report $128,000 in income in 1998. By 1999, income reached $10 million, boosted in part by a tax credit and a one-time gain in connection to a beauty licensing agreement.
For the year, DKI posted $19.2 million in income on revenue of $662.7 million. Excluding costs related to the merger and the reversal of a tax valuation allowance, income would have been $14.6 million.
According to DKI’s annual report for 2000, filed Monday with the Securities and Exchange Commission, the company’s customers include Bloomingdale’s, Macy’s, Saks Fifth Avenue, Neiman Marcus, Nordstom and Dillards, in addition to its own freestanding stores. Excess product and out-of-season merchandise are sold in the company’s outlet stores.
The SEC filing said that no customer accounted for more than 10 percent of the company’s revenue in 2000, other than Federated Department Stores — including Bloomingdale’s, Macy’s and affiliated stores — at about 10.2 percent. DKI’s 10 largest wholesale customers accounted for approximately 40.4 percent of the company’s revenues during 2000.
Revenues from retail operations — 52 outlet stores and 17 full-price retail operations — in 2000 were $126.8 million. Licensing revenue for the year was $45.2 million, while wholesale sales totaled $490.7 million.

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